Bigger Government = More Prosperous Country?

The Harvard economist Greg Mankiw reprints a chart, from his economics textbook, that shows how much bigger the U.S. government became as a result of the Great Depression and the Second World War. In the early nineteen-thirties, federal government revenue was less than five per cent of U.S. G.D.P. By the mid nineteen-forties, it was nearly twenty per cent of G.D.P., and has essentially stayed between fifteen and twenty per cent ever since. Mankiw’s point is that while the Great Depression and the Second World War were short-term crises, the increase in government spending (which was a response to those crises) was permanent.

Now, Mankiw tells this story as a cautionary tale, arguing that increasing government spending to fight the current recession (as Barack Obama has argued we should) could very well end up permanently increasing the size of government. This is a bad thing, he implicitly suggests, saying that “advocates of limited government”—of whom he’s one—“are rightly worried about the fiscal stimulus package.”

To an outside observer, though, there’s something interesting about that graph: the decades after government got so big just happen to be the decades of greatest shared prosperity in the history of the U.S. A large and growing middle class, rising levels of education, greater income mobility, continued increases in life expectancy, dramatic improvements in the quality of life of the elderly, and so on, all happened only after government revenues rose to what Mankiw apparently believes were objectionable levels. That doesn’t necessarily mean that the increase in the size of government had anything to do with the postwar economic boom. But, at the very least, Mankiw’s graph shows that the supposed negative economic effects of government-spending increases are, at best, empirically very hard to see.

Of course, for “advocates of limited government”—people for whom bigger government and higher taxes are, in philosophical terms, bad things—this is irrelevant. Their case against government is not primarily driven by its practical impact on people’s everyday lives but rather by the fact that bigger government necessarily entails greater intrusions and constraints on the economic freedom of individuals. But for the rest of us, who are more pragmatic in our approach to finding the proper balance between the roles of the public and private sectors in the economy, Mankiw’s graph certainly offers no evidence that we should fret about a possible increase in government spending. (I’m not saying that evidence doesn’t exist, but Mankiw’s graph doesn’t provide it.)

James Surowiecki is the author of “The Wisdom of Crowds” and writes about economics, business, and finance for the magazine.